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Chapter 25: Q.12 (page 676)

In general, how does credibility (or lack thereof) affect the aggregate supply curve?

Short Answer

Expert verified

When individuals expect more inflation, the aggregate supply curve will shift upwards in the short run.

Step by step solution

01

Content Introduction

Let us look at credibility of the central bank and the aggregate supply curve and tend to make analysis.

02

Content Explanation

People's expectations of inflation would be significantly lower if the central bank had high credibility, because we just trust the central bank. We expect they will follow an anti-inflationary strategy. When individuals expect more inflation, the aggregate supply curve will shift upwards in the short run.

Another factor is that we believe the central bank's confidence is significantly stronger, thus we forecast lower inflation. So, in essence, when I get the supply curve to shift to the right, we'll see the short.

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Various survey-based measures of inflation expectations are available reflecting consumer, market, and economists" outlooks. For instance, the Survey of Professional Forecasters (SPF) is available from the Philadelphia Federal Reserve at https//www.philadelphiafed.org/research-and-data/ real-time-center/survey-of-professional-forecasters/, while the well-known University of Michigan consumer inflation expectations survey is available at https://fred st1ouisfed org/series/MICH. Compare the most recent readings of inflation expectations of the SPF and Michigan survey to actual CPI inflation. In general, which one seems to be more accurate?

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